Michael Burry kicked off the new year with a prediction.
“Inflation peaked. But it is not the last peak of this cycle,” the eccentric star of Michael Lewis’s subprime drama said.
“We are likely to see CPI lower, possibly negative in 2H 2023, and the US in recession by any definition,” he added. “[The] Fed will cut and government will stimulate. And we will have another inflation spike. It’s not hard.”
Unfortunately, it is hard, if “it” means macro forecasting in general. In fact, it’s impossible, because it involves making predictions about unpredictable humans, many of whom are even more mercurial than Burry.
Burry, like a lot of folks who’ve been spectacularly right about something at one point or another, seems to think he’s always right. In fairness, we probably do owe him a little more leeway in that regard than most. After all, he really did call the housing bust, with no caveats or asterisks. Burry isn’t hawking a revisionist history of his financial crisis exploits like so many self-aggrandizing charlatans.
But, Burry’s social media presence often betrays an inclination to incite strong feelings, to put it politely, and not just on matters related to markets. I do sympathize with his penchant for deleting his own tweets, though. I do that habitually, and not by design.
In Monday’s news void, Burry’s tweet was “good” enough to garner at least one headline. Unfortunately, it seemed to misquote him. “US Is in Recession ‘By Any Definition’, Michael Burry Says,” read the title of an article that landed above one outlet’s digital fold. I imagine they’ll change the title once I publish this, but you’ll be able to see it in the URL even if they tweak the headline, which I saved for posterity here.
If you notice in the tweet, Burry didn’t say the US is currently in a recession. He said we’re “likely to see” the world’s largest economy in a recession in the second half of 2023, when CPI will be lower and “possibly negative.”
That’s not some pedantic nitpick of Bloomberg’s coverage. This is a critical point. You can say a lot of things about the US economy, and if you’re someone like Burry, you’re probably inclined to a glass half-empty view, but one thing you can’t say is that the US entered 2023 in recession “by any definition.” Maybe one day, with the benefit of revisions and hindsight, the NBER will declare that a recession began in Q1 of 2023, but even an all-knowing Cassandra like Burry would have a difficult time preemptively tallying up revisions that haven’t been made yet.
By contrast, it’s very easy to predict a recession by the second half of the year, which is what Burry did. In fact, saying the US will be in a recession during the back half of the year is basically just a reiteration of the consensus view, although I doubt most economists would couch things in the same sort of deterministic terms as Burry.
The median estimated US recession probability over the next 12 months is 65%, according to a Wall Street Journal survey. Goldman is more optimistic, in part due to assumptions about resilient consumption tied to higher disposable income as inflation wanes, but even their relatively rosy odds are 35%.
As for Burry’s suggestion that the Fed will cut rates, Jerome Powell certainly doubts it, but the market doesn’t. Traders still have a pair of 25bps cuts priced for the back half of the year. So, again, Burry isn’t saying anything new, and I don’t think he was trying to.
As for his contention that “the government will stimulate,” that’s tenuous. Congress is divided, partisan rancor is as bad as it’s been in modern history and the GOP is avowedly against any sort of additional fiscal spending.
In any case, the lesson here is that if you’re going to turn tweets into click-bait, be sure you read them right.
Back of napkin.
Volckerismist assuming mimic.
I think the more controversial/interesting take is the idea that inflation will get back up after dropping.
Inflation isn’t magic. It needs to come from somewhere/something. If Burry thinks the government will stimulate us back into inflation, fine, that’s a prediction I disagree with but okay.
But inflation will pop back up, just because? No. Give me a reasoning.
How about: 2024 is a presidential election year?
That’d be an incentive to keep inflation controlled? A recession only affects the unlucky ones who lose their jobs. Inflation, as we’ve seen, pisses off everyone.
…developed world finally accelerating move away from fossil fuel dependence causing related commodity demand…?
You are certainly onto something there about inflation’s relationship with the public’s PO index and we can probably agree that when the price of oil goes up, the price of everything else goes up causing inflation. Now, putting it mildly, democrats and the current administration are not oil friendly and the feeling is mutual. So, I look for $200/barrel oil in 2024 that red waves Sarah Palin into the white house on a drill baby drill platform. Having lived through the Carter years, “I have a really bad feeling about this” as they say in the movies.
global food shortage…? … anti immigration policies keeping employment tight / wage spiral fears alive…? …
onshoring of manufacturing / protectionism … ? …global liquidity issues forcing central bankers to blink…?
…climate change disasters and resulting demand / supply scarcity…? … I see possibilities for stickiness. Of course if we fall to deep recession inflation should follow…just my 3 cents … happy and healthy new year to all…
Global food is not suffering from shortages. Yes, the Russian invasion of Ukraine was a blow to established distribution networks and made things difficult in, e.g., Egypt. Lack of Russian fertilizers was painful. Still, grain production is up in 2021 and 2022. So we’ll manage if the logistics allow.
Anti immigration is definitely a popular political position in the US. Nonetheless – “After a sharp drop in naturalizations in the early stages of the coronavirus pandemic, immigrants in the United States are becoming citizens in numbers not seen for more than a decade. A line graph showing that annual naturalizations in the U.S. have recovered from pandemic lows and are approaching all-time highs. More than 900,000 immigrants became U.S. citizens during the 2022. (…) The rebound in naturalizations aligns with upticks in other measures of legal immigration”.
Things can obviously always go wrong. But, for the time being, climate change related disasters are localised enough to have a mostly ‘benign’ aggregate effect. The transition away from fossil fuels may stress some commodities but it’s long term investment and gearing us towards energetic abundance so I suspect its short term impact will be limited and it’s long term deflationary…
Stickiness is not impossible, but I doubt we’ll get sticky at 4-5%.
appreciate your added color and perspectives, as well as your usual efforts…hope 2023 is kind to you, family, and friends…
Thanks and always glad to exchange with others. Best wishes to you and yours in 2023! I certainly would appreciate a kinder market… 🙂
“But Inflation will pop back up, just because?” I think you may be asking the wrong question. The better question is “why will inflation stay low/down?”
The early 80’s was the fourth annual CPI peak (with each such annual CPI peak higher than the prior peak) since the early 1960s (these peaks in annual CPI were 1966, 1970, 1974 and 1980) – in the early 1960s, annual CPI was just above 1.0%. Following prior annual CPI peaks, the fed funds rate starting declining relatively quickly (less than a year following the immediately prior annual CPI peak) and soon got to the same level or below the concurrent annual CPI number. It wasn’t until the fourth annual CPI peak in this series in the early 1980s that the fed (after in interim minor move down that it quickly reversed) kept the Fed Funds rate above the annual CPI for an extended period (18-24 months, even while annual CPI was trending down) prior to reducing but still kept the federal funds above the concurrent annual CPI number by ~250 bps or more for the rest of the 1980s decade. Even if the Fed can get inflation back to 2% quickly (not likely), our financial markets are clearly not prepared for a Fed Funds rate of 4.5% or higher (that 250+ bps spread throughout the last 80%+ of the 1980s) for an extended period. Note too my stats are based on the annual CPI (with its inherent lag dynamics), not on the monthly CPI.
When you use the 60s and the 70s as a template, you need to account for 1-the Vietnam war, its unpopularity and the gun and butter inflation it started. 2- the abandonment of the gold standard that was the result. 3- the 1974 first oil shock that was due in no small part to the end of the gold standard. And 4- the second oil shock.
I’m not saying there wasn’t excessive government spending and a wage price spiral at work but I also see lots of wars/oil shocks impacting oil prices. And the Russian invasion of Ukraine did make things significantly worse, inflation-wise, in 2022. So that’s not a surprise.
But unless Putin tries to invade Kazakhstan in 2023 or Iran/Saudi Arabia decides to duke it out, oil/energy inflation isn’t pre-ordained.
Fun fact: I’ve only ever been blocked by one person on Twitter: Michael J. Burry. It wasn’t even for a reply to one of his tweets, but rather a reply-to-a-reply.
I still wanted to follow along with what the Trump-apologist Elon-fanboy closet-racist Burry was saying though, which was how I found the invaluable @BurryArchive . Since Burry deletes every tweet he makes after a day or so (to throw off bots and scam artists he says, apparently correctly), it’s an especially helpful resource for someone who’s not on Twitter every single day.